Crude price in $50-70 range is good for India and the world: Anish De, Partner, KPMG India

In an interaction with Bilal Abdi, KPMG’s Partner Anish De highlights the need to include Oil & Gas in GST and to focus on the natural gas infrastructure. Edited excerpts..Bilal Abdi | ETEnergyWorld | Updated: December 01, 2017, 10:08 IST

New Delhi: The global energy sector is undergoing major transformation with adoption of new-age fuels and technologies, and the shift is now fast catching pace in the country's energy sector as well. In an interaction with Bilal Abdi, KPMG’s Partner, Infrastructure, Government and Healthcare Leader, Oil and Gas, Anish De shares his perspective on the need to include hydrocarbons in GST's ambit and the focus on the country's natural gas infrastructure. Edited excerpts..

What, according to you, are the major challenges being faced by the oil and gas industry, considering high crude prices, the advent of Electric Vehicles and the push towards cleaner energy?These dynamics have been there before and they will remain for some time. Crude prices have shot up in the past and have come down later. Even if we are seeing a temporary high we do not expect it to breach the $70 level at least not on a sustained basis. Around $50-$70 is the new normal and that price is good for the world and for India. If it falls below $50, we will not have the Dollars for exploration and even domestic companies will suffer. If you do not get the proper price for the output, that is a problem. I think $50-$70 is a safe range for the industry to operate.

On renewables, it is part of the overall trend of electrification which the Oil and Gas industry has to be cognizant of. Electric vehicles will come as per government policy or ambitions and that is the part of the overall electrification trend which they should be careful about. It is a long-term trend and there are two crucial aspects here – the number of vehicles sold and vehicle stock. Even if we assume that by 2025, 25 percent of the vehicles will be EVs, the vehicle stock will be minimal. Oil and Gas consumption is driven by vehicle stock and not just by sale of vehicles. For the Oil and Gas sector to be affected by EVs and also renewables at large in India, is a long-term possibility, not a near-term trend. No immediate problem as such.

Also, Oil Minister Pradhan has talked about the upcoming 60 MT refinery. It makes a lot of sense. Demand for products is still growing in India and will continue to grow. We are nowhere close to the potential of our consumption. Economic growth is also strong or is expected to be strong. Also, large refineries not only produce fuels their main output is petrochemicals. Future refineries will be integrated with petrochemical complexes. We will have petrochemicals demand for a long time even with EVs in the picture. Finally, we also have old refineries and some of them will be shut down in due course as new refineries will have better margins. If we really reach a point where there is surplus capacity, we always have an option of shutting down the old refineries which is a prudent step to take.

The economy has faced a few disruptions recently -- GST, de-monetisation, increasing crude oil import bill. What kind prudent measures will the government have to take to deal with these issues? The inclusion of Oil and Gas in GST for the sector is an absolute necessity without which the entire supply chain could break down. Now it is not about which slab it will fall in, but the fact that it needs to be included in the regime. The Government has not been able to do it so far but it has to be done. In case it is done, we expect the industry to get a fillip. Overall, the Indian economy will grow for the next decade because it is driven by demographics. So, we have a safe landing period for the next few years where the economy will continue to grow which will lead to tax buoyancy and economic activity pushing energy consumption. Positive growth is going to continue for a while.

What are your views on OPEC’s Vienna meet? Do you think another extension of output cut could take place?OPECdid a decent job in the last round of production cut. They coordinated well which has had a role to play in pushing prices up and taking out excess inventory from the system. Excess inventory is economic waste. The problem for OPEC is that production cut and its impact on prices is a double-edged sword. The moment production is cut and prices start moving up on a sustained basis, shale comes back roaring which immediately diminishes the efforts of OPEC. Also, with higher crude prices, the move towards electrification becomes faster. I think the combination of these factors will make OPEC very careful. I think they might still go ahead with some amount of production control but not to a point where it comes back and hits them.

Do you think the government will be able to manage to bring down oil imports by 10 per cent by 2022?Like many of the missions of the government this is a directional one. Such targets constitute directional messages and we need to see them as that rather than literally reading them as a numerical target by which we assess success or failure. India had a declining production regime which has now been arrested. Potentially, we will see an increase in production, more in gas and also for oil. ONGC’s Vashishta field has come online, Reliance and BP have made investments and plan to increase production. If one puts all of that together, one would see that the directional message has been picked up by the market. Also, there is DSF and the new auctions under OALP. I do not expect a 10 per cent import reduction happening but I will rather be happy with 10 per cent production increase in two to three years, which will happen in Gas, though the picture in Oil production is less clear. That itself is a directional message because if we do the right things now, 10 years down the line, we will be much better placed when the new assets resulting from the initiatives from the Government under the HELP program come into production. Considering the quantum of our oil imports, every increase in production is a help.

The government is a talking about shifting to a gas-based economy. But with the status of CGD network, CGD biddings and the less than expected capacity utilization of LNG terminals, how fast will we able to achieve that goal?I think with the new terminals which are being created may face a problem of demand and that is not unusual. Globally, LNG terminals work at 50-55 per cent capacity utilization. Nowhere receiving terminals work at excess of 100 per cent capacity utilization on a sustained basis. And the spare capacity will create the market. Otherwise, we cannot really have market creation. We do need more LNG terminals and we need spare capacity in those terminals. Of course, if the capacity utilization goes down to 20-30 per cent then that is a problem.

From a gas vision standpoint, few things are important -- foremost being, inclusion of natural gas in GST. But, subject to that, creating infrastructure is a very important element which we have to work on. The oil minister has said that it is for the first time that government has provided budgetary support to create gas infrastructure. The second aspect is to work on demand creation because there are various elements leading to demand destruction. For example, pet coke burning, fuel oil burning etc. will need to stop that because they are extremely polluting and the environment is being impacted on a daily basis. We need to make sure that those fuels are subjected to appropriate regulations.

The third important aspect is markets and regulation. We still have not been able to usher markets in gas as we have done successfully in power. It is entirely possible. The government has talked about creating a gas hub and a gas trading platform but the movement on that has been slower than desired. Similarly, in terms of regulation, PNGRB needs to be resurrected and do a much better job than they have in the past. That will create the momentum required to shift to a gas-based economy.